Don't get down on your 401(k)

Making decisions about retirement savings can be complicated. Many workers may see recent drops in the value of their employer-sponsored 401(k) programs and question whether they should be making changes.

Following are some answers to common questions about 401(k) programs and saving for retirement.

Q. My employer matches 50 cents for every dollar I contribute up to 6 percent of what I put into my 401(k), but I am putting in 8 percent. Is there a better use for that additional 2 percent such as a Roth IRA?

It depends on whether you want an immediate tax break, or a tax break in retirement, said Chad Terry, director of retirement solutions at Principal Financial Group, a provider of retirement and investment services.

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Money in your 401(k) plan is contributed before taxes, which helps reduce your taxable income now. It's growing tax-free but you will pay taxes when you take it out in retirement. Money contributed to a Roth IRA is put in after taxes. The earnings on the account and withdrawals in retirement are tax free if you wait until 591/2 to take withdrawals, and the money has been in the account for at least five years.

A Roth IRA is generally most appropriate for people who will be paying more taxes in retirement than they are now, which some advisers say is not that unusual.

For example, many retirees could end up paying more taxes as they lose their home mortgage deduction when they pay off their home, and they lose the tax benefit of setting aside money in a 401(k). What's more, at 70 1/2 they are required to start taking 401(k) distributions, which are declared as income and, when combined with other income, could push them into a higher tax bracket.

A retirement calculator and others provided by Financial Industry Regulatory Authority can be found at its Web site at: http://apps.finra.org

Q. With the recent downturn in the stock market, I'm telling myself I should just leave the money where it is to be poised for a rebound. Should I consider some reallocation/withdrawal of funds?

Your investment strategy should remain consistent based on your risk tolerance, savings goals and length of time to retirement.

“Even though it may be difficult not to react to the market, remember that saving for retirement is a marathon, not a dash,” Terry said. “History shows that the pain of a down market doesn't last forever. Losses from market declines are merely paper losses until the asset is actually sold.”

Withdrawal from a 401(k) prior to age 59 1/2 will make the paper investment loss real, and result in a 10 percent penalty on top of the taxes that must be paid.

Yet there are times when it makes sense to capture a capital loss, usually when an investor wants to offset short-term capital gains.

The research measures each bull and bear market as a period of at least four consecutive months of continuous gain or decline, as measured by the S&P 500. It found that over the last 60 years, there have been 12 bear markets, lasting an average of 14 months and declining a total of 22.4 percent before recovering.

But the 12 bull markets since 1948 have lasted an average of 45 months, each growing an average of 123.9 percent.

The study found that a $10,000 investment in the S&P 500 in 1988 would have grown to $72,932 by June 30, 2008, despite the 43 percent downturn of 2000-02.